What is a Value Chain?

Also known as value chain analysis, a value chain is a strategy that involves the creation of a systematic set of steps or activities that incrementally add value to the goods or services produced. With this approach, there is an understanding that each and every activity involved adds a little more value to the finished product. In the event that a step does not appear to add value, it is assessed closely to determine if the step is necessary to the production process. If so, then actions are taken to find ways to add some sort of value at that point in the process.

With a true value chain, the process begins with looking at the pre-production factors, moves through the production process itself, and then moves on to the marketing and sale of the products. The activities will also include the actual delivery process for the products, and any back end service and support that may be required to maintain a healthy relationship with the customer. The chain also addresses such issues as human resources support, research and development, and other factors that indirectly contribute to the production of the product. This often involves segregating the various essential activities into two main categories: primary and support.

The primary activities in a value chain are those that focus on the actual creation and manufacture of the product. A primary activity would include the receipt of raw materials, the configuration of the production floor itself, and the packaging of the finished goods. Support activities would include the development of the product itself, ongoing employee support and training conducted under the auspices of a human resource department, and the cost of managing those employees. Another support mechanism in the value chain is the procurement of raw materials that are of high quality, but with the lowest cost possible.

With a value chain, each facet of the operation is structured so that it adds some sort of tangible or intangible value to the ultimate goal of producing products that are desirable to consumers. This approach is more comprehensive than other strategies, in that it looks beyond the simple production process, and considers the costs and benefits associated with administrative, marketing, and other factors that ultimately play a role in attracting and keeping customers. By looking at every aspect of the process, beginning with the procurement of raw materials and ending with the continued satisfaction of the customer, this model helps to increase the chances for success, and thus helps to position the company to compete in the marketplace more efficiently.